Investing in America’s Biggest Growth Industry: Medicare Fraud

Written on:November 21, 2014
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While the nation has become embroiled in the Affordable Care Act debate, a critical element of U.S. health care practices has been less noticed: Medicare fraud and its huge financial impact on the economy.Medicare Fraud: America's biggest growth industry

Medicare fraud costs taxpayers an estimated $800 billion a year, according to the Bloomberg News. This includes false claims, overcharges, networks doctors and hospitals over-inflating bills and billing for services that were never delivered.

But the fraud also exists at a different level: legislatively-allowed and legal overcharges by pharmaceutical companies and hospitals who can charge prices that are immune to bulk purchase discounts and are immune to price negotiations.  All of this is the result of the Medicare Prescription Drug Bill enacted in 2003, as one of the greatest health care scams ever perpetuated on taxpayers. The bill was shepherded through Congress by Billy Tauzin (R-La) and was so controversial that two of his fellow Congressmen accused him of using unethical practices to advance a bill that was written by pharmaceutical industry lobbyists. (For more on Tauzin, see below.)

For investors, this institutionalized fraud, in all of its various forms, presents a great investing opportunity, but one which can also carry an even greater direct costs to some those who have medical conditions serious enough to warrant hospitalizations or costly, long-term treatments.  This means that any gains in individual issues, such as hospitals, pharmaceutical and health care companies, can easily be surpassed by individual medical bills that are inflated as a result of the institutionalized fraud practices.

Then, there is an even greater societal cost since U.S. taxpayers are paying for a health care system, which under-delivers quality care, compared to other developed nations around the world, while charging some of the highest costs in the world for comparable services.

When combined, Medicare fraud in its broadest sense, negatively affects all Americans, regardless of race, economic status and political beliefs. Yet, it has continued for decades and is now a permanent feature of the health care industry and continues to evade serious enforcement.

The reason for this, like the decades-long discussion about border enforcement and the so-called war on drugs, is that Medicare fraud persists because certain people and corporations are profiting from these practices and are constantly working to prevent these them from being curtailed.   This fraud is so ingrained that it has become part of the establishment politics that dominate the national health care debate.  As a result, aside from a few insider beneficiaries, the entire nation suffers.

Here are some specifics about Medicare fraud, its national impact and why it is a double-edged sword to health care industry investors, who think they are making a portfolio profit on one hand and then often losing more when it comes to paying individual medical bills.

What Medicare Fraud Costs the Nation

Medicare and Medicaid expenditures account for 22% of the Federal budget, according to the Congressional Budget Office in its fiscal year 2013 report.  This is about $1 trillion spent annually on health care by the federal government and this amount subsidizes almost everyone who received medical insurance, either privately or publicly, including people who receive medical benefits via an employer-sponsored plan.

The problem with the nation’s health care system is that it has evolved piece-meal over time, and consists of a variety of private plans and individuals who moved from private to public plans, such as Medicare and Medicaid. Coverage varied widely across the nation as each state’s insurance commissioners (many of which are very cozy with those they regulate) and allowed insurers to rank applicants either through an underwriting process or a rating system which based premiums on variables, such as age, sex and health status.

Based on this process, only about 73% of applicants (on the high end) received insurance while the rest were disqualified because they filed to meet the standards or had pre-existing conditions, according to author Edward Kleinbard.  Of those who received coverage, about 33% paid above-average premiums, as well as high co-pays and deductibles (over $5,000 annually) since they were part of Preferred Provider Organizations (PPOs), based on 2008 industry data, as cited by Edward Kleinbard in his book, We Are Better Than This.

Prior to the Affordable Card Act (ACA), workers under 65 years old primarily relied on employer-sponsored health care plans and federal subsidies.  While it is not politically correct in Republican circles to acknowledge, federal subsidies are an essential element of the health care system since they are part of business tax credits applied to employee compensation. Specifically, the cost of health care premiums in employer-sponsored plans are considered tax-exempt for both income and payroll tax purposes.  This subsidy costs the Treasury about 9% of its revenues over the next 10 years, according to the CBO in 2013. The problem is that health care costs have risen faster than inflation.  This is because people think their coverage is “free” and also as a result of Medicare fraud, or unrestrained illicit billing.

Origins of the Fraud

The U.S. health care system is more akin to the Wild West than the highly-regulated market conservatives like to think.  There are over 40 large medical insurance providers, mostly insurance companies, nationwide and this does not include the Veterans Administration, Medicare and Medicaid.  In turn the insurance companies buy medical services from PPOs and HMOs which are then marketed to individuals, often without any competitive pricing.

Without competition, insurance companies have no incentive to fight price increases charged by hospitals and medical groups since they just pass those higher rates along to employers and their unsuspecting employees.

The Benefits of the Affordable Care Act (ACA)

Despite the hysteria surrounding the ACA, the Congressional Budget Office in 2012 estimated that changes to the nation’s health care system as contained in the ACA would cut the federal deficit by $100 billion over the next decade by charging new taxes as a result of expanding coverage to 25 million Americans, according to Kleinbard.

The ACA also contains provisions which buttressed the financial stability of Medicare Part A (hospital services, which will become more evident in the long-term, Kleinbard said.  The ACA also seeks to inject competition in the national insurance system which was lacking before, especially in less populated, poorer areas..

What Medicare Fraud Costs Individuals

Fraud and inefficiency are the  hallmarks of the nation’s health care system that have long gone uncorrected.  A recent story in Bloomberg News said $800 billion is wasted annually to manage the U.S. health care system. Instances of waste of common.  For instance, a RAND study (Health Affairs, 2009, as cited in Kleinbard) calculated that it costs each doctor about $68,000 annually to deal with an insurance company.   Another study by the New America Foundation, 2013, found that $100 billion to $400 billion is wasted on administrative costs alone to deal with insurance companies.

The Institute of Medicine said $765 billion, or about 30 cents per dollar spent on health care in 2009, was wasted on high prices, inefficiencies, high administrative costs and poor preventative medical practices, according to Bloomberg News.

How Medicare Fraud Hurts the Nation

Opponents of health care reform have railed against socialized medicine in other nations and often cite the long waiting periods that people must endure before they receive needed treatment.  But as one of the most world’s most economically developed nations, with one of the world’s most expensive health care systems and the world’s largest per capita medical spending, the U.S. has done a poor job of delivering quality services compared to the dollars spent.

The National Academy of Sciences in 2013 (as cited in the U.S. Health in International Perspective) found that the U.S. spends more than about 30 other nations, yet ranks seventh from the bottom in terms of life expectancy.  The U.S. also ranks high in the number of people who die from communicable diseases, has the worst infant mortality rates, most obese children, highest rate of diabetes and the greatest number of citizens susceptible to cardio-vascular diseases.   This is despite the fact that the U.S. spends more than any other nation, about 18% of GDP in 2013, according to the OECD, more than 10 other OECD nations.  This includes $8,508 spent on health care per person annually, according to the OECD in 2010.  Worse, these huge amount of money have not translated into a healthier nation.

How Medicare Fraud Affects Individual and Families

My wife died of leukemia after a six-year bout with endometrial cancer.  During that period, I visited cancer hospitals in Seattle, Sacramento and Tampa, yet it was in the last six weeks of her life, when she was in intensive care at Morton Plant Hospital in Clearwater, Florida, that I saw Medicare abuse firsthand.

This abuse consisted of unnecessary tests administered at all hours of the day and night, unnecessary visits from non-relevant doctors who stopped in for a chat or minor exam, the prescription of unnecessary and expensive medicine, including a $6,000 a month prescription for a rare infectious disease from a communicable disease doctor (she had leukemia which is not communicable), as well as other unnecessary intravenous fluids.  The most telling example was when she requested to be released from Morton Plant a few days before hospice that the chief intensive care attending physician said he wanted to keep her for a few extra days for “observation.”  At the time she was terminal and any “observation” was obviously unnecessary, except for the expense of charging Medicare for the room.

At a subsequent bereavement group in Clearwater, Florida, I heard similar stories from other widows and widowers, including one from a woman whose husband was brain dead, yet had to be submitted to four more brain scans, which only confirmed what the first one did.  I spoke with doctors who told me they would never allow a loved one to be in any hospital unless they were accompanied by another family member 24 hours a day in order to prevent the administration of invasive, painful and unnecessary tests on another loved one.

From my experience, the facilitator for Medicare fraud inside of the hospital can be directly tied to hospitalists, a relatively new category of doctor who works for the hospital.  While the polite definition of a hospitalist is that they act as a liaison with the family to keep them informed about the treatment and prognosis of their loved one, I only met my hospitalist for about one minute who did not provide me with any information.

Instead, I believe she existed to let other doctors know that a new patient was admitted to the hospital and that they were now fair game to be visited by any other doctor on the hospital staff, including an infectious disease doctor who had absolutely no reason to visit my wife, so they could submit a bill to Medicare.  This explains  why I received a 33-page Medicare bill for my wife’s last week or so at Morton Plant Hospital in Clearwater, Florida, even though  her main leukemia doctor told her to go home “because the doctors her do not understand her disease (leukemia).”

In this personal observation, I saw doctors who knowingly violated their stated oath to “do no harm” as they pursued the fees from Medicare and submitted my wife to unnecessary pain and suffering.

Medicare Fraud Affects Everyone

Medicare fraud is so lucrative that it is ingrained into the political culture.  Despite the fact that this fraud affects old and young, all races and all political parties, it remains persistent because it is not seriously punished, Not only is the fraud in all of its forms, legal and illegal, a national disgrace, but it has involved unethical Congressional conduct from legislators who knowingly abused their power to gain better-paying jobs in the private sector.

Here are three great examples of how lucrative Medicare fraud is and how its perpetrators can commit it, yet still remain outstanding members of the political and business communities.

The poster boy for this duplicitous conduct is former Congressman Billy Tauzin (R-Louisiana) to become chief lobbyist for the pharmaceutical industry trade association.

Former Congressman Billy Tauzin (R-LA.) -- Doing anything for money

Former Congressman Billy Tauzin (R-LA.) — Doing anything for money

“Billy Tauzin, the former congressman turned pharmaceutical industry lobbyist, was paid $11.6 million in 2010, the year he brokered a deal with President Barack Obama that helped pass the health-care overhaul.

“After the law was signed, Tauzin left his job as head of the Pharmaceutical Research and Manufacturers of America, or PhRMA, as the highest-paid lobbyist among groups most involved in the overhaul debate. Karen Ignagni, leader of the insurer lobby, was paid $1.5 million in 2010 while Tom Donahue at the Chamber of Commerce made $4.8 million, tax records show.”

Quoted from Bloomberg News

Tauzin’s betrayal of Americans is costing the nation billions in higher prescription costs and despite rhetoric about the benefits of free competitive markets, relies on monopoly, non-competitive pricing to lock in profits to the pharmaceutical industry. No other developed country allows their pharmaceutical industry to practice predatory pricing on its own citizens, but it is allowed in the U.S.

Newt Gingrich--Show me the money

Newt Gingrich–Show me the money

Similarly, former Republican presidential candidate and U.S.  House Speaker Newt Gingrich grossed $55 million from 2001 to 2010 for consulting services and memberships in a health-policy center he ran. All this shows there is big money in Medicare fraud for the right people.  Gingrich is now a commentator for CNN.

Florida Governor Rick Scott amassed his personal fortune as the CEO of Columbia-HCA which he grew into a hugely profitable hospital network.  By 1994, his company had over 340 hospitals, 135 surgery centers and 550 home health locations, with some 285,000 employees.

Scott resigned as CEO in 199. That was the same year that federal agents announced their  investigation into the company. “In time, it became apparent that the investigation focused on whether Columbia/HCA bilked Medicare and Medicaid for tests that were not necessary or ordered by physicians, and for attaching false diagnosis codes to patient records to increase reimbursement to the hospitals,” according to Politifact.com.

Rick Scott: His firm was fined $1.7 billion for Medicare fraud

Rick Scott: His firm was fined $1.7 billion for Medicare fraud

 

To show the scope of the investigation, the U.S. Justice Department announced  “the largest government fraud settlement in U.S. history when Columbia/HCA agreed to pay $840 million in criminal fines and civil damages and penalties. Among the revelations from the 2000 settlement, which all apply to when Scott was CEO, were that Columbia overbilled Medicare for unnecessary tests and false diagnosis codes,” according to Politifact.com  In a second series of similar penalties against Columbia/HCA in 2002, the Feds received an additional $881 million. This brought the total fine against Columbia-HCA to $1.7 billion.

And since corporations are people, as part of the 2000 settlement, Columbia-HCA agreed to plead guilty, but Scott, an actual human being, was never indicted. In his court testimony, he said he could not recognize his own signature on corporate documents. Still, Scott was able to keep his fortune and was elected governor of Florida, which has a huge Medicare-Medicaid constituency, for two successive terms.

How To Stop Medicare Fraud Tomorrow

While Federal authorities continue to investigate Medicare and Medicaid fraud nationally, there is a more direct way to stop fraud at the very locations where much of it occurs. This can be done by granting nurses ironclad whistle blower protection status to inform authorities about unnecessary tests they are often asked to administer in hospital and doctor’s office setting.  From my experience, nurses are better informed about the impact and need for procedures, and more importantly, have a very different financial incentive than doctors and hospitals.

Since they have no financial incentive to administer unnecessary tests and procedures on patients, nurses should be able to openly question why a specific test is needed.  It is worth nothing that it was a nurse at Texas Health Presbyterian Hospital in Dallas who alerted the public that there were professional and cultural lapses that put nurses and the public in danger to EBOLA. These lapses by the hospital would probably never have become public if it were not for the nurses.  (See story on this web site.)

Nurses have pulled me aside and told me to remove a loved one from a hospital or that a certain test was unnecessary.  But due to the medical hierarchy, these nurses risked censure or termination if anyone heard them voice their informed opinion. In these cases, the medical culture itself fosters fraud in the form of unneeded tests and expenses that serve no purpose and subject uninformed patients to unneeded pain and suffering. Give the nurses whistle blower protections or, at least, access to a confidential national hotline.

 How Investors Can Benefit from Medicare Fraud

Of course, it is very cynical to suggest that investors can benefit from Medicare fraud, but sadly it happens every day.  Shareholders of Columbia-HCA certainly did until the firm was eventually fined. Similarly, investors can purchase health care ETFs, and some of the companies listed in those ETFs benefit from charging excessive costs to patients, and indirectly, to taxpayers.

But this type of investing also carries huge social costs which can easily outweigh any individual portfolio gains.  For example, if an investor makes $5000 by investing in a health care company which benefits from Medicare fraud, but then incurs a $8,000 hospital bill that incorporates the cost of Medicare fraud, that portfolio profit should be reduced to reflect the cost of the fraud.  Of course, this would be a small reduction, unless the fraud also translates into diminished quality of medical services.  And based on OECD studies cited earlier in this story, that is certainly the case in the U.S. But in the world of economics and investing, that diminished quality would be considered an externality, unless of course, it directly affected your health treatment.  Then, it becomes personal, not some abstract concept.

As a result, the optimal way to benefit from Medicare fraud is if the investor resides outside of the U.S. Citizens of the UK, Switzerland, France, Canada, Norway or Germany, for example, which have variations of a single-payer-private health insurance systems, could pocket any portfolio profits, yet still enjoy the better-quality medical care in their own countries. In these instances, they could avoid the social costs, and just pocket the profits, less taxes and currency conversion costs.

This is why institutionalized fraud is a good investment for those who have a direct role in delivering health care in the U.S. This is the same system which dominates corporations in the military-industrial, agricultural, pharmaceutical, oil, research and scientific sectors, which all receive huge federal subsidies. Yet executives in these industries are not the ones which rail against big government and federal over-reach.The reason is that they are beneficiaries from federal largess and benefit from federal inefficiency and poor financial oversight.

So while investors can reap profits in an isolated health care portfolio, as a nation, this institutionalized fraud reduces the standard of living for everyone and for generations to come.  Here’s to your health.

 

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